At the stroke of midnight on 30th June 2017, the Goods and Service Tax (GST) was introduced to the nation. Since then, GST has been the talking point just about everywhere. As is to be expected from something new, there have been mixed reactions to GST. This article discusses some of the basics of GST.
Erstwhile indirect tax structure in India
Prior to the introduction of GST, India had a bewildering array of indirect taxes. Basically, indirect taxes are taxes that are not levied on income. The three major indirect taxes were
- Central Excise, which was levied on manufacture;
- VAT, which was levied on sale; and
- Service Tax, which was levied on rendering of services.
This system of taxation suffered from a number of inefficiencies. One of the principal inefficiencies was the cascading of taxes. For instance, it was difficult to ascertain if the sale of a SIM card was a sale or service, or whether installation of a lift involved a sale of a product or a contract for both material and labour. Another inefficiency was the concept of valuation- for instance, how is it possible to assign a value to the service of an advocate?
Apart from the above, there are other taxes which are indirect in nature:
- Additional Customs Duty, commonly known as Countervailing Duty (CVD)
- Special Additional Duty of Customs
- Surcharges and Cesses levied by Centre
- Central Sales Tax
- Entertainment Tax (unless it is levied by the local bodies)
- Luxury Tax
- Taxes on lottery, betting and gambling
- State Cesses and Surcharges in so far as they relate to supply of goods and services
- Octroi and Entry Tax
- Purchase Tax
All these taxes would now be subsumed under GST.
Taxes that will not be subsumed under GST
There are still some items of taxation that will not be subsumed under GST.
- Tax on items containing alcohol
Alcoholic beverages for human consumption would be kept out of the purview of GST as an exclusion mandated by a constitutional provision. Continuing with existing practice, sales tax or VAT may be continued to be levied on alcoholic beverages as per the existing practice. VAT is levied on alcohol purchases in some states, and there will be no objection to that. Excise duty, which is presently levied by the states, may also be unaffected.
- Tax on petroleum products
The full range of petroleum products, including crude oil and motor spirits including Aviation Turbine Fuel (ATF) and High Speed Diesel (HSD), would be kept outside GST, as is the prevailing practice in India. Sales tax could continue to be levied by the states on these products with the prevailing floor rate. Similarly, the central government could also continue its levies.
- Entertainment tax levied by local bodies
Some local bodies levy an entertainment tax. For instance, some state governments levy a tax on circuses – these would continue and are not subsumed under GST.
- Other state levies
There are other levies by some state governments such as professional tax and property tax. These would also continue as per the present regime and will not be subsumed under GST.
Salient Features of GST
- GST will be applicable on supply of goods or services as against the present concept of tax on the manufacture of goods or on sale of goods or on provision of services.
- GST will be based on the principle of destination-based consumption taxation (levied where goods and services are consumed) as against the present principle of origin-based taxation (levied where goods and services are produced).
- There will be a dual GST with the Centre and the states simultaneously levying it on a common base. The GST to be levied by the Centre will be called Central GST (CGST) and the one to be levied by the states, including union territories with legislatures, will be called State GST (SGST). Union Territories without legislatures will levy Union Territory GST (UTGST).
- An Integrated GST (IGST) will be levied on inter-state supply (including stock transfers) of goods or services. The Centre will collect this so that the credit chain is not disrupted.
- Import of goods will be treated as inter-state supplies and will be subject to IGST in addition to the applicable customs duties.
- Import of services will also be treated as inter-state supplies and subject to IGST.
- CGST, SGST (or UTGST) and IGST will be levied at rates to be mutually agreed upon by the Centre and the States under the aegis of the Goods and Services Tax Council.
- A common threshold exemption will apply to both CGST and SGST. Taxpayers with an annual turnover of Rs. 20 lakhs (Rs. 10 lakhs for the special category states specified in Article 279A of the Constitution) will be exempt from GST.
- A compounding option (that is, to pay tax at a flat rate without credits) will be available to small taxpayers (including to specified categories of manufacturers and service providers) having an annual turnover of up to Rs. 75 lakhs. The threshold for the exemption and compounding scheme will be optional.
- Exports will be zero-rated – that is, no VAT will be levied on them.
Advantages of GST
It is expected that the physical interface between the taxpayer and the tax authorities would be minimal under GST due to the following provisions:
- There will be cross-empowerment of officers belonging to central and state governments. An officer of CGST will be empowered to act as a proper officer of SGST and vice versa.
- Registration will be granted online and shall be deemed to have been granted if no deficiency is communicated to the applicant within 3 common working days by the tax administration that has been allotted the examination of the application. Such allotment is to be done alternately between the central and the state Tax administrations.
- The taxable person shall herself assess the taxes payable (self-assessment) and credit it to the account of the government. The return filed by the taxpayer would be treated as self-assessed.
- Payment of tax shall be made electronically through Internet banking, or also through credit card and through the modes of Real Time Gross Settlement (RTGS) or National Electronic Funds Transfer (NEFT). Smaller taxpayers shall be allowed to pay tax over the bank counter. All challans for payment of tax shall be generated online on the Goods and Services Tax Network (GSTN).
- The taxpayer shall furnish the details of outward supplies electronically without any physical interface with the tax authorities. Inward supply details would be auto-drafted from the supply details filed by the corresponding suppliers.
- Taxpayers shall file, electronically, monthly returns of outward and inward supplies, ITC availed, tax payable, tax paid and other prescribed particulars. Composition taxpayers shall file, electronically, quarterly returns. Omission and incorrect particulars can be self-rectified before the last date of filing of return for the month of September of the following year or the actual date of filing of annual return, whichever is earlier.
- Reversal for mismatched invoices and reclaim of input tax credit shall be done electronically on the GSTN portal without any contact with the taxpayer. This electronic system would also prevent, inter alia, input tax credit being taken on the basis of fake invoices or twice on the same invoice.
- Taxpayers shall be allowed to keep and maintain accounts and other records in electronic form.
- Check posts would be eliminated at state borders thereby facilitating faster movement of goods between states.
Input tax credit
The taxpayer is allowed to take credit of taxes paid on inputs (input tax credit), as self-assessed, in her return. The taxpayer can take credit of taxes paid on all goods and services, other than a few items in the negative list, and utilise the same for payment of output tax. Credit of taxes paid on inputs can be taken where the inputs are used for business purposes or for making taxable supplies. Full input tax credit shall be allowed on capital goods on its receipt as against the current Central Government and many State Government practice of staggering the credit in more than one instalment. Unutilised input tax credit can be carried forward. The facility of distribution of input tax credit for services amongst group companies has been provided for through the mechanism of Input Service Distributor (ISD).
Disadvantages of the proposed GST
Despite a number of advantages, the proposed system of GST also presents some disadvantages. The unstated purpose behind the numerous provisions of GST appear to be to get as many taxpayers as possible onto the GST bandwagon. Specific provisions for paying GST would discourage large enterprises from dealing with them as this would block their working capital. This could lead to many small enterprises being forced either to register under GST or choose to exit their businesses. There are also too many rates of taxes under GST. One of the main issues for litigation under the erstwhile central excise law was deciding on the classification of the goods manufactured as per the HSN Code. A similar tariff list has been proposed under GST which would mean that the classification disputes would not vanish overnight.
If implemented properly, GST can be a true game changer. The government will have to strike a balance between revenue collections and the economic interests of the small and medium enterprises in the country.
Mohan Lavi is a Chartered Accountant with over 28 years of post-qualification experience. He is a partner with K.P Rao & Co, Chartered Accountants, Bengaluru and heads their IFRS and GST practices.